Question

The cash budget serves which of the following purposes?

a. Documents the need for liberal inventory policies.
b. Reveals the amount of depreciation expense.
c. Reveals the amount lost due to uncollectible accounts.
d. Provides information about the ability to repay loans.
e. None of the above.

Answer 1

The cash budget's primary purpose is to provide information about a company's ability to repay loans by highlighting its liquidity position. It is essential in financial planning and helps in ensuring there are sufficient funds for the company's operational needs.

Step-by-step explanation:

The correct answer to the student's question is option (d), which states that the cash budget provides information about the ability to repay loans. A cash budget is a financial plan that estimates cash flows over a particular period. It serves several critical purposes, such as helping business managers ensure they have enough cash to meet obligations, planning for capital expenditures, and arranging for adequate financing should cash shortfalls occur.

Moreover, a cash budget reveals the liquidity position of a company, which is essential for maintaining good relationships with creditors and the ability to repay borrowed funds. It does not primarily document inventory policies, reveal depreciation expense, or show losses from uncollectible accounts. These are accounted for in other financial statements like the income statement and balance sheet.